The brain trust in Redmond, Wash., is wagering its future on the success of Windows 8. And last week, the company did yeoman's work keeping the focus on the next version of its iconic operating system, which was previewed by some 5,000 software developers and analysts at a trade show in Anaheim, Calif., that coincided with the analyst meeting.

THE EARLY REVIEWS WERE very favorable, but the key word is "early." The good news is that Windows 8 should finally make Microsoft competitive in tablets and smartphones. Not only does Windows 8 give Microsoft touch-screen capabilities and other features that consumers take as a given with Apple's iPad and Android-based tablets, it will provide those same advances to its core personal computer users.

But Rick Sherlund, a prominent software analyst at Nomura Securities, argues that if non-Apple devotees need Windows capability, they will still welcome Windows tablets and laptops a year from now. "Windows 8 should put Microsoft in the game to be competitive with a touch-based version of Windows," says Sherlund who has a Buy rating on the stock with a price target of 32. The stock was trading late Friday at 27 and change.

Adding the new capabilities is critical to protecting the company's franchise in personal-computer operating systems, as super-light laptops, tablets, smartphones and other devices replace desktop computers.

ISI Group's enterprise technology analyst, Bill Whyman, likewise thinks that Microsoft could fare better than most folks expect, but that still means being only a distant third in smartphones, at best, and merely viable in tablets. Whyman is giving Microsoft the benefit of the doubt, despite its failure to reveal details and milestones for makers of tablets and new Windows phones.

Chief Executive Steve Ballmer acknowledged that Microsoft is fighting for third in mobile. "We haven't sold as many [phones] as we would have liked by now," he said. "I won't say I love where we are, but I like where I think we can be."

The CEO made no bones about the need to devote so much energy and resources to mobile and tablets, explaining that anything less could jeopardize Microsoft's chances of making the transition to the post-PC era of computing. "Windows is front and center in our strategy," Ballmer said. "We have to change Windows."

Ballmer added that all of Microsoft's efforts, from game systems to cloud computing, are part of a grand strategy to keep Microsoft in the game for a long time. "This transition to the cloud is very early," Ballmer said. "But it has the most profound effect over time in regards to revenue models."

The meeting was long on strategy and vision and short on details. The software giant no longer gives financial guidance on earnings and revenue. Goldman Sachs software analyst Heather Bellini expects the company to raise its quarterly dividend as much as 21% after this week's board meeting, which could push the yield close to 3%.

What about Yahoo? Ballmer indicated that he didn't expect to see any changes in the relationship and results from its Internet search partnership with Yahoo! in the wake of former CEO Carol Bartz's ouster two weeks ago. "It's important for them, and it's important to us," he said.

SINCE THE FIRING OF BARTZ, speculation has run rampant that
Yahoo!yhoo -2.004275788348477%Yahoo! Inc.U.S.: NasdaqUSD36.67
-0.75-2.004275788348477%
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15018132AFTER HOURSUSD36.59
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Volume (Delayed 15m)
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5.337700145560407Market Cap
34412702840.9857
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(YHOO) is in play. But don't look for Microsoft to kick those tires again. Microsoft already got what it wanted from Yahoo! in the way of the search partnership. What's left of Yahoo! is more of a digital content play, which Microsoft has largely exited. Microsoft is losing $2.5 billion a year in Internet services, to investors' chagrin. Still, Ballmer gave no indication of exiting the business because he sees search as a strategic necessity for competing in cloud and mobile.

What's more, obstacles make a takeover or buyout of Yahoo! highly unlikely, as we pointed out in a feature story last week ("Can Anyone Save Yahoo?," Sept. 12), because of the change-of-control issues tied to its highly valuable Asian Internet assets.

The Wall Street Journal reported last week that Yahoo! had been talking to Silver Lake Partners, which has experience with major technology buyouts. But even Silver Lake, in league with other private-equity firms, could have trouble scraping up the $25 billion to $40 billion needed to buy Yahoo!